Asset Prices in a Small Production Network

Francisco Ruge-Murcia

Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ

Abstract: This paper constructs an asset pricing model where heterogeneous sectors interact with each other in a production network as producers and consumers of materials and investment goods. Idiosyncratic sectoral shocks are transmitted through the network with the dynamics being affected by the heterogeneity in production functions and capital adjustment costs. The model is estimated using sectoral and aggregate U.S. data. Results show that 1) shocks to the primary sector account for a substantial part of the equity premium in all sectors because their volatility is much higher than that of shocks to the other sectors, and 2) the model endogenously generates conditional heteroskedasticity despite the fact that shocks are conditional homoskedatic. These results depend crucially on the presence of network effects.

Keywords: network; input-output; production economy; stock returns; sectoral shocks (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2018
New Economics Papers: this item is included in nep-dge, nep-mac and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montec:02-2018

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